So far, the “important” part of earnings season is essentially over, and the results are better-than-expected. Companies have cited margin issues and supply chain disruptions, but management teams have been able to navigate these issues and investors are looking past the disruptions as temporary and are instead focusing on continued strong demand. Put plainly, fears that all of these factors would potentially reduce expected 2022 S&P 500 earnings has not come to fruition. That’s why you’ve seen this market rally to all-time-highs, led by the “average stock”, i.e., not MAGA.
Earnings have been more positive than feared early in the month, but upside is clearly less than the prior three quarters. In the prior three quarters, 2021 consensus EPS for the S&P 500 was increased by ~$10 each earnings season, this season it looks like it is going to be ~$3-4 (from ~$199 to ~$203). This is still very strong historically, but also shows the meaningful sting of supply chain shortages.
So far, in Q3, 83% of companies have beat earnings estimates – the rate remains well above the historical average of 66%. However, this figure is down from Q1 and Q2, where 87% and 88% beat earnings estimates, respectively.
The one big thing that we continue to focus on is overall margins at the index level. Historically, it’s difficult for the market to get into “trouble”, i.e., see increased volatility (or a downturn), when margins are increasing or stabilizing. While this is not the first pause we have seen in margins over the last year, it does come in the middle of earnings season – which is somewhat concerning.
For more detailed earnings analysis on our HNW Compounders sleeve, continue here: HNW Earnings Recap
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